Verizon Earnings On Deck As Competition Heats Up

Verizon (NYSE:VZ) is set to announce its Q3 FY2012 earnings on July 18th. During the earnings call, we will take a close look at the carrier’s net subscriber additions to see how it is performing amid an industry-wide saturation in wireless growth. Having a big lead over rivals in LTE coverage has so far helped Verizon overcome a saturated market to post impressive market share gains in the past year. But AT&T’s (NYSE:T) aggressive marketing in Q2, which it expects to have netted it a higher-than-expected 500,000 wireless subscribers during the quarter, may have dented Verizon’s figures for the quarter. Increasing smartphone penetration should however enable Verizon to post a sequential gain in postpaid ARPU levels, bolstered by data ARPU and increasing LTE adoption.

In addition to the company’s financials, we will be looking for comments regarding Vodafone’s 45% stake in the wireless division. Many rumors have surfaced in the past several months suggesting that Verizon is interested in buying out Vodafone’s stake in the wireless joint venture, but no deal has been announced as yet. The current ownership structure of Verizon Wireless means that Verizon is able to reap only about half the profits generated by the more valuable wireless division while having full control of the declining landline business. By our estimates, Verizon’s stake in Verizon Wireless contributes almost 80% to its enterprise value of about $220 billion. While taking over full control of its wireless business gives Verizon a larger share of the earnings, it will also have to take on additional debt to fund the buyout making the acquisition price a very important question for Verizon’s shareholders.

The U.S. wireless market has become increasingly saturated with wireless connections having exceeded the population in mid-2011. This has made acquiring new subscribers, especially those that pay for the higher-margin data plans, very tough for the wireless carriers. Despite this, Verizon has banked on its better 4G LTE coverage to do much better than rivals on the postpaid front in recent quarters.

While Verizon is nearing the end of its initial LTE deployment phase, closest rival AT&T isn’t expected to reach the same milestone until 2o14. AT&T’s LTE network is currently available in about 328 U.S. markets and expects to cover 90% of its planned 300 million POP LTE deployment by the end of 2013, according to its first quarter results

Sprint is way behind with its LTE coverage in all of 110 markets across the U.S. as compared to AT&T’s 328 and Verizon’s 500. With 4G LTE expected to dominate the wireless scene in the years to come, Verizon has done really well to earn this early lead by executing well on its network transition plans. As a result, the company has been exceeding expectations in recent quarters, adding a disproportionate number of subscribers at the expense of rivals.

Last year, Verizon racked up as many as 5.1 million postpaid net adds in 2012 versus AT&T’s 1.4 million for the full year. The trend seems to be continuing this year as well, with Verizon adding as many as 677,000 net postpaid subscribers during Q1 2013 – more than double AT&T’s postpaid net adds for the same quarter. This caused AT&T to increase its marketing spend on promotions in Q2 to attract more subscribers, helping it give a higher-than-expected net adds guidance for the quarter. It will be interesting to see if AT&T’s net subscriber adds have come at the expense of Verizon’s or one of the other smaller carriers like Sprint, which completed the shutdown of its iDEN network during the quarter.

Share Everything Plans

With industry-wide subscriber growth expected to further slow down in the coming years as the market gets more saturated, wireless carriers are increasingly focusing on growing their data ARPUs as well as getting subscribers to buy more mobile devices. In order to drive data consumption, Verizon launched its Share Everything plans towards the end of last year. These plans make the process of adding more mobile devices to the carrier’s network hassle-free. While this might decrease the average revenue per device since the non-smartphone connected devices consume much less data, as users connect more devices to the wireless network, Verizon will be able to draw additional revenues from each individual subscriber. Moreover, since their data consumption is low, it will help shore up the service margins for Verizon.

The focus on margins is also evident from the fact that Verizon has prohibited its unlimited plan users from availing smartphone subsidies in case they want to continue using their plans. (see Verizon’s Share Everything Plans Could Kill The Last Unlimited Plans) This, we believe, is a step in the right direction since it will help Verizon more efficiently manage network resources that are not exactly unlimited in nature and monetize every bit of data transferred through its pipes. The limited nature of spectrum is evident in the spectrum crunch that the industry is currently facing, which has necessitated a number of M&A deals in the past several months. AT&T’s recent bid for Leap Wireless’ airwaves was preceded by Sprint’s acquisition of Clearwire last week and Verizon’s deal with the cable companies for their AWS spectrum last year.

The scrapping of the grandfathered unlimited plans could however backfire if Sprint’s latest move to offer a lifetime guarantee on its unlimited plans becomes popular and starts a pricing war. Sprint now has additional spectrum from Clearwire, and Softbank’s expertise and cash does five it the cushion to launch aggressive plans and compete better with Verizon and AT&T.

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